MAHINDRA & MAHINDRA LTD, MUMBAI V. ACIT 2(2), MUMBAI

ITA 6961/MUM/2012

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9747 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 08-10-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 19-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M V RAJGURUDR
• Assessee Lawyers: H P MAHAJANI
• Keywords: Depreciation; Transfer pricing; International transaction; Question of law; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37(1); 10B; 37

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND AMARJIT SINGH,JUDICIAL MEMBER ./I.T.A./5575/MUM/2012, / ASSESSMENT YEAR: 2002-03 ./I.T.A./6961/MUM/2012, / ASSESSMENT YEAR: 2003-04 M/S. MAHINDRA & MAHINDRA LTD. GROUND FLOOR, MAHINDRA TOWERS, WORLI ROAD NO.13, WORLI MUMBAI-400 018. PAN:AAACM 3025 E VS. DCIT- CIRCLE-2(2) ROOM NO.545, 5TH FLOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI-400 001. ( /APPELLANT ) ( / RESPONDENT) ./I.T.A./5533/MUM/2012, / ASSESSMENT YEAR: 2002-03 ./I.T.A./7184/MUM/2012, / ASSESSMENT YEAR: 2003-04 DCIT- CIRCLE-2(2) MUMBAI-400 001. VS. M/S. MAHINDRA & MAHINDRA LTD. MUMBAI-400 018. ( /APPELLANT ) ( / RESPONDENT) / REVENUE BY: SHRI M.V. RAJGURU-DR /ASSESSEE BY: SHRI H.P. MAHAJANI / DATE OF HEARING: 19/01/2018 / DATE OF PRONOUNCEMENT: 21 .03.2018 PER RAJENDRA, AM - CHALLENGING THE ORDERS DTD.22/06/2012 AND 07/09/12 OF THE CIT(A)-15,MUMBAI,THE ASSESSEE AND THE ASSESSING OFFICER(AO)HAVE FILED CROSS APPE ALS FOR THE ABOVE MENTIONED ASSESSMENT YEARS(AY.S).THE ASSESSEE,A PUBLIC LIMITED COMPANY,I S ENGAGED IN MANUFACTURING OF AUTO - MOBILE VEHICLE,DEALING IN DEVELOPMENT/ CONSTRUCTION ACTIVITIES, TRANSPORT SOLUTIONS ETC. THE DETAILS OF FILING OF RETURN OF INCOME,DATES OF ASSE SSMENT ORDER ETC.ARE TABULATED BELOW FOR READY REFERENCE. A.Y. ROI FILED ON RETURNED INCOME ASSESSMENT DT. AS SESSED INCOME 2002-03 28.10.2002 RS.156,34,64,632/- 07.02.2005 RS .74,46,61,305/- 2003-04 11.11.2003 RS.107,83,98,160/- 30.12.2005 RS .7,68,35,530/- ITA/5575/MUM/2012,AY.2002-03: 2. DURING THE COURSE OF HEARING BEFORE US,THE REPRESEN TATIVES OF BOTH THE SIDES AGREED THAT EXCEPT FOR THE GROUNDS NO.1,2,17 AND 18 ALL THE REM AINING GROUNDS ARE COVERED-I.E. THEY STAND DECIDED IN FAVOUR OF THE ASSESSEE OR AGAINST IT OR HAVE BEEN SET ASIDE-BY THE ORDERS FOR THE TRIBUNAL FOR THE AY.S.2008-09(ITA/586/MUM/2015) ,1999-2000(ITA.S/2344 & 3037/ MUM/2009),2000-01(ITA.S.3998 & 4542/MUM/2010 AND 20 01-02(ITA.S7581 & 7846/ MUM/ 2011). 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 2 GOA ISSUE ISSUE COVERED IN FAVOUR /AGAINST ASSESSEE 3. DEVELOPMENT EXPENSES-HORIZON III PROJECT EXPENSE S TRACTOR DIVISION RS. 8.96 CRORE (INCLUDING STAFF COST, MATERIAL OF RS. 4.67 CRORES DEALT WITH SEPARATELY . AGAINST 3.A. IN-HOUSE REVENUE EXPENDITURE- STAFF COST, MATE RIAL OF RS. 4.67 CRORES INCURRED AS PART OF DEVELOPMENT PROJECT S FAVOUR 4. DEVELOPMENT EXPENSES EURO II PROJECT OF RS. 47. 66 LAKHS AGAINST 5. TECHNICAL SERVICES FEES OF RS. 65, 00, 50, 757/- INCLUDING STAFF COST, MATERIAL OF RS. 15.55 CRORES AGAINST 5.A IN-HOUSE STAFF COST AND MATERIAL CONSUMPTION OF RS. 15. 55 CRORE INCURRED AS PART OF DEVELOPMENT PROJECT FAVOUR 6. EXPENDITURE ON LICENCE FEE PAID TO SAP ASIA SYST EMS- RS. 2. 89 CRORE FAVOUR 7. PAYMENT TO SDRC INDIA PRIVATE LTD. RS. 59.45 LAK HS FAVOUR 8. CONSULTANCY CHARGES PAID IN CONNECTION WITH TRAN SPORT SOLUTION GROUP RS. 1.70 CRORE FAVOUR 9. CONSULTANCY CHARGES TO MAKE BUSINESS CUSTOMER CE NTRIC RS. 1.51 CRORE FAVOUR 10. PRIOR PERIOD EXPENSES RS. 57.15 LAKHS SET ASI DE 11. DISALLOWANCE U/S. 40A (9) RS. 9.13 LAKHS FAVO UR 12. PROVISIONS FOR WARRANTIES RS.6.84 CRORE SET A SIDE 13. PREMIUM ON REDEMPTION OF DEBENTURES RS. 3 LAK HS FAVOUR 14. DEDUCTION FOR SPECIAL PENSION BASED ON ACTUARIA L VALUATION RS. 1.26 CRORE FAVOUR 15. EMPLOYEES COMPENSATION EXPENSES ON ACCOUNT OF E SOP - RS. 6.67 CRORE SET ASIDE 17. DISALLOWANCE U/S. 14A- 115 JB RS. 7.85 CRORE FAVOUR 2.1. RESPECTFULLY FOLLOWING THE ORDERS OF THE AY.S.2008- 09,1999-2000,2000-01 AND 2001-02 (SUPRA),WE DECIDE GROUNDS NO.3A.4 AND 5 AGAINST TH E ASSESSEE.GROUNDS NO.10,12 AND 15 ARE SET ASIDE AND REMAINING GROUNDS ARE DECIDED IN FAVO UR OF THE ASSESSEE. 2.2. GS.OA. 1,2,16 AND 18 WILL BE DEALT IN THE SUBSEQUEN T PARAGRAPHS. ITA/5533/MUM/2012,AY. 2002-03: 3. SIMILARLY,IN THE APPEAL FILED BY THE AO, IT WAS AGR EED BY THE DEPARTMENTAL REPRESENTATIVE (DR) AND THE AUTHORISED RESPRESENTATIVE (AR) THAT EXCEPT GROUND NO.3, REST OF THE GROUNDS ARE COVERED BY THE ORDER OF THE EARLIER YEARS.WE AR E SUMMARISING THE ISSUE IN TABULAR FORM. GOA ISSUE ISSUE COVERED IN FAVOUR /AGAINST THE AO 1. PROVISION FOR PENDING LABOUR DEMAND RS. 4.80 C RORE AGAINST 3. DISALLOWANCE OF APPRECIATION ON SALE OF UNDERTAK INGS AGAINST 4. ADDITION OF PROVISION FOR LABOUR DEMAND-GOA-1 CO NSEQUENTIAL TO GOA-1 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 3 3.1. ACCORDINGLY,WE DECIDE GROUND.1,2, AND 4 AGAINST THE AO. 4. AS INDICATED AS PARAGRAPH 2.2,WE ARE TAKING UP THE REMAINING GROUNDS OF THE APPEAL FILED BY THE ASSESSEE FOR THE AY.2002-03 I.E. ITA/5575/MUM/2 012.FIRST GROUND OF APPEAL,IS ABOUT ADJUSTMENT MADE ON ACCOUNT OF TRANSFER PRICING(TP). DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO INTERN ATIONAL TRANSACTION (IT.S) WITH ITS AE.S NAMELY MAHINDRA USA(MUSA).TO DETERMINE THE ARMS LE NGTH PRICE(ALP),HE MADE A REFERENCE TO TRANSFER PRICING OFFICER (TPO).DURING THE TP PROCEEDINGS,THE TPO FOUND THAT THE ASSESSEE HAD ENTERED INTO FOLLOWING IT.S: SN. NATURE OF TRANSACTION AMOUNT IN (RS.) 1. SALE OF TRACTORS 87,18,40,815/- 2. SALE OF SPARE PARTS 3,42,57,803/- 3. REIMBURSEMENT ADVERTISEMENT EXPENSES 1,35,37,809 /- 4. REIMBURSEMENT OF WARRANTY EXPENSES 1,39,53,457/- SHE FOUND THAT THE ASSESSEE HAD BENCHMARKED THE EXP ORT TRANSACTIONS AND DETERMINED THE ALP BY APPLYING COST PLUS METHOD (CPM),THAT THE IT.S WE RE ONLY IN THE TRACTOR SEGMENT, THAT IT HAD AN INSTALLED CAPACITY OF RS.1.12 LAKHS TRACTORS,THA T IT COULD SELL ONLY 5,684 UNITS DURING THE PREVIOUS YEAR RESULTING IN UNDER-UTILISATION OF 48. 69% OF ITS CAPACITY,THAT IT HAD SOLD 3,153 TRACTORS TO MUSA,THAT IT HAD SOLD TRACTORS TO OTHER COUNTRIES LIKE CHILIE,ROMANIA,TANZANIA, EGYPT AND SAARC COUNTRIES NAMELY BANGLADESH, NEPAL AND SRI LANKA. SHE FURTHER FOUND THAT THE ASSESSEE HAD NOT CONSIDERED ALL DIRECT AND INDIRECT COST OF PRODUCTION FOR DETERMINING ALP,THAT IT HAD CONSIDERED ONLY VARIABLE COST INCLU DING COMMISSION FOR BENCHMARKING THE IT.S,THAT IT HAD MADE COMPARISON AT THE NET PROFIT LEVEL AND NOT AT GROSS PROFIT LEVEL, THAT IT HAD COMPARED NET PROFIT AS RATIO OF ITS COSTS,THAT COST PLUS MARGIN CALCULATED IN THE ABOVE MANNER WAS COMPARED WITH THE NET COST PLUS MARGIN OF OTHER ENTITIES ENGAGED IN THE SIMILAR LINE OF BUSINESS,THAT THE FINAL COMPARABLE AND THEIR PROFIT MARGIN WAS AS UNDER :- NAME OF THE COMPANY MARK UP ON COSTS EICHER LIMITED 0.18% ESCORTS LIMITED 5.39% PUNJAB TRACTORS LIMITED 17.50% AVERAGE MARGIN 8.24% THE MARGIN REPRESENTED THE ASSESSEES PROFIT EARNE D BY IT.S WITH ITS AE.IN THE ANALYSIS CARRIED OUT BY THE ASSESSEE MARGINAL COST INCURRED FOR PRODUCTION OF UNITS SOLD TO ITS AE.S WAS CONSIDERED AS UNDER:- PARTICULARS EXPORT OF AE SALE PRICE 8840.82 MATERIAL COSTS 6272.61 MANUFACTURING EXPENSES 90.59 FREIGHT 151.71 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 4 TOTAL VARIABLE COST 7365.81 DIRECT MARKETING EXPENSE 549.06 TOTAL COSTS 7914.87 NET PROFITS 926.75 NET PROFIT TO COSTS RATIO 11.71% ON THE BASIS OF ABOVE COMPARISON,THE ASSESSEE CONTE NDED THAT ITS MARK-UP ON COST AT 11.70% WAS HIGHER THAN AVERAGE MARK UP IN THE CASE OF UNR ELATED ENTERPRISES (8.24%) AND THAT IT.S WERE AT ARMS LENGTH. 4.1. HOWEVER,THE TPO WAS NOT CONVINCED BY THE SUBMISSION S MADE BY THE ASSESSEE AND HELD THAT A SIGNIFICANT TURNOVER OF THE COMPARABLE WAS I N THE DOMESTIC TERRITORY, THAT THERE EXPORT SALES WERE LIMITED ,THAT THE OVER-ALL PROFITS OF TH E COMPARABLE-WHICH AROSE PREDOMINANTLY FROM DOMESTIC MARKET-COULD NOT BE COMPARED WITH THE PROFITS EARNED BY IT IN ITS CONTROLLED TRANSACTION WITH ITS AE, THAT THE ASSESSEE HAD NOT MADE THE COMPARISON AT GP LEVEL AS REQUIRED BY THE INDIA TP REGULATIONS AND THAT COMPA RISON WAS MADE AT NET PROFIT LEVEL,THAT UNDER CPM CLOSE SIMILARITY OF THE PRODUCTS DEALT WA S NECESSARY,THAT IN THE LIGHT OF THE DISTINC -TION MADE BY THE ASSESSEE BETWEEN THE KIND OF TRAC TORS,SOLD IN THE DOMESTIC TERRITORIES AND THE USA MARKET(USED IN HOUSEHOLD GARDENS)THE COMPAR ISON MADE BY IT WAS INCORRECT,THAT THAT THE INTERNAL COMPARABLE SHOULD BE PREFERRED TO EXTE RNAL COMPARABLES WHILE APPLYING CPM,THAT IT HAD MERELY CONSIDERED THE MARGINAL COSTS OF PROD UCTION WHILE CALCULATING ITS PROFIT MARGINS,THAT METHOD ADOPTED BY THE IT WAS NOT IN AC CORDANCE WITH THE REQUIREMENTS OF THE INDIAN TP REGULATIONS.THE TPO DIRECTED THE ASSESSE E TO USE INTERNAL COMPARABLE TO DETERMINE ALP OF THE IT.S AND FILE EXPLANATIONS IN THAT REGAR D.THE ASSESSEE FILED A DETAILED SUBMISSIONS BEFORE THE TPO DURING THE TP PROCEEDINGS AND STATED THAT IN ORDER TO FUNCTION THROUGH ITS SUBSIDIARY IN USA,IT HAD TO TERMINATE THE AGENCY OF TWO OTHER THIRD PARTY US ENTITIES,THAT IN ACCORDANCE WITH THE CONTRACTUAL RELATIONSHIP BETWEE N THE ASSESSEE AND THOSE ENTITIES,THAT IT WAS REQUIRED TO PAY A COMPENSATION AT THE RATE OF U SD 100 FOR EVERY TRACTOR SOLD IN SPECIFIED TERRITORIES IN USA.AFTER CONSIDERING THE REPLY OF T HE ASSESSEE,THE TPO HELD THAT THE ASSESSEE HAD CONSIDERED ONLY MARGINAL COSTS FOR THE PURPOSES OF APPLYING THE CPM,THAT IT HAD EXCLUDED ALL FIXED OVERHEAD, SUCH AS LABOUR AND MANUFACTURIN G OVERHEADS, THAT SUCH EXPENSES WERE IN THE NATURE OF VARIABLE COSTS,THE ASSESSEE HAD NOT C ONSIDERED THEM AS A PART OF ITS VARIABLE COSTS,THAT BENCHMARKING UNDERTAKEN BY THE ASSESSE E BY CONSIDERING THE INTERNAL COMPARABLE TRANSACTIONS SHOWED THAT IT HAD EARNED A HIGHER NET PROFIT MARGIN ON ITS TRANSACTIONS WITH THIRD PARTIES AS AGAINST ITS TRANSACTIONS WITH THE RELATE D PARTY,THAT THE SALE OF GOODS TO AE AND THE PRICING IN THAT REGARD HAD CONSISTENTLY RESULTED IN A LOSS TO THE ASSESSEE AT THE NET PROFIT LEVEL,THAT AE HAD MADE A PROFIT AT THE NET LEVEL,TH AT IT HAD BORNE THE ENTIRE BRUNT OF THE MARKET 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 5 PENETRATION STRATEGY,WHILE THE AE ENJOYED A REGULAR RETURN,THAT IT HAD BEEN FOLLOWING THE SAME PRICING POLICY BASED ON MARGINAL COSTS SINCE THE YE AR 1995,THAT MARKET PENETRATION STRATEGY AND A MARGINAL PRICING DECISION COULD NOT BE JUSTIF IED FOR SEVEN YEARS AT A STRETCH,THAT IT HAD NOT PRODUCED ANY CONTEMPORANEOUS EVIDENCE TO SHOW THAT THE PRICING DECISION WAS ACTUALLY MADE ON THE BASIS OF ANY MARKET ANALYSIS JUSTIFYING THE MARGINAL CONSISTING DECISION. FURTHER, THE TPO MENTIONED THAT EVEN IF THE ASSESSEE'S CONTE NTION REGARDING ADOPTION OF MARGINAL COSTS FOR DETERMINATION OF ALP WAS TO BE CONSIDERED ,AN ADJUSTMENT WAS STILL REQUIRED.SHE SUGGESTED FOLLOWING ADJUSTMENTS: (RS. IN LAKHS) TOTAL COST OF THE ASSESSEE 8388.70 NET PROFIT @ 13.44% ON ASSESSEE'S COSTS 112 7.44 ARMS LENGTH PRICE OF THE SALES MADE BY THE ASSESSEE 9516.14 ADJUSTMENTS NEEDED TO BRING THE SALES TO ALP 675.32 4.2. DURING THE APPELLATE PROCEEDINGS BEFORE THE FIRST A PPELLATE AUTHORITY (FAA) THE ASSESSEE MADE ELABORATE SUBMISSIONS.AFTER CONSIDERING THE AV AILABLE MATERIAL, HE HELD THAT COMPUTING A LP BY CONSIDERING ONLY VARIABLE COST WAS AGAINST RULE 10 B, THAT ALL DIRECT/INDIRECT COSTS PRODUCTIONS HAD TO BE CONSIDERED, THAT THE ASSESSEE HAD CONSIDERED ITS OWN FIGURES BY THE MARGINAL COST INCURRING,THAT IN THE CASE OF THREE C OMPARABLES IT DID NOT FOLLOW THE SAME PATTERN, THAT THE MARKET PENETRATION THEORY WAS NOT ACCEPTABLE, THAT HE OF THE ASSESSEE WAS MAKING PROFIT AS DISTRIBUTOR IF ONLY VALUE-ADDED EX PENSES WERE CONSIDERED, THAT MARKET PENETRATION COULD NOT CONTINUE FOR SEVEN YEARS, THA T THERE WAS NO EVIDENCE TO DEMONSTRATE THAT THE MARGINS AND BY THE AE COULD NOT BE BENCHMARKED WITH US COMPARABLES USING A AS TESTED PARTY,THAT THERE WAS NO DOUBT THAT EXPORT TURNOVER TO OTHER COUNTRIES WAS LOWER AS COMPARED TO THE, THAT SUCH DIFFERENCES WAS MUCH WIDER WHEN C OMPARED TO BENCHMARKING WITH THREE COMPARABLES, THAT IT HAD NOT BEEN DEMONSTRATED THAT ON VOLUME ANY DISCOUNT WAS GIVEN BY THE ASSESSEE, THAT US WAS A DEVELOPED MARKET, THE ASSES SEE SHOULD HAVE EARNED HIGHER MARGINS FROM EXPORT AS COMPARED TO OTHER COUNTRIES, THAT TN MM WAS THE BEST METHOD, THAT TRACTORS SOLD TO US AND OTHER COUNTRIES LIKE NEPAL, SHRI LAN KA AND BANGLADESH WERE NOT COMPARABLE DUE TO DIFFERENCE IN HORSEPOWER AND GEOGRAPHICAL DI FFERENCES,THAT TNMM WAS TOLERANT TO MEASURE PRODUCT DIFFERENCES AND MINOR FUNCTIONAL DI FFERENCES, THAT IF ONLY VALUE-ADDED EXPENSES WERE CONSIDERED THE PROFITABILITY OF THE A E WAS 6.9%, THAT THE MARGIN EARNED BY THE AE WAS NOT A VALID ARGUMENT, THAT QUANTITY DIFFEREN CES WERE NOT SIGNIFICANT WHEN CPM WAS APPLIED. 4.3. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)STATED T HAT THE ASSESSEE HAD REFERRED TO 3 COMPARABLES FOR BENCH-MARKING THE TRANSACTION,THAT THE ARITHMETIC MEAN ARRIVED AT WAS 11.7% 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 6 AS COMPARED TO 8.24 % OF THE COMPARABLES,THAT THE T PO ADOPTED TNMM,THAT SHE REJECTED THE METHOD ITSELF, THAT THE ADDITION MADE BY HER WAS NO T BASED ON ANY LOGICAL PRINCIPLES. REFERRING TO CIR.NO.2001 DTD 23/8/2001 ISSUED BY CB DT,HE CONTENDED THAT THE TPO HAD CONSIDERED AE AND NON AE EXPORT,THAT EXPORT TO US W AS 3153 UNITS WHEREAS EXPORT TO OTHER COUNTRIES WAS 368 TRACTORS ONLY,THAT OUT OF 368 UNI TS ONLY 44 TRACTORS WERE SOLD TO LATIN AMERICAN AND EUROPEAN COUNTRIES,THAT REST OF THE UN ITS WERE SOLD TO SAARC NATIONS THAT COMPARING THE SAARC NATIONS WITH USA WAS NOT JUSTIF IABLE, THAT NUMBER OF UNITS WOULD DISTORT THE MARGIN, THAT SALES MADE TO LATIN AMERIC AN COUNTRIES WAS ON EXPERIMENTAL BASIS THAT TPO HAD NOT CONSIDERED THE VOLUME DIFFERENCE, GEOGRAPHICAL CONSIDERATION, THAT THE USA MARKET WAS MORE COMPETITIVE, THAT THE AE WAS THE DI STRIBUTOR, THAT SEMI KNOCKED DOWN TRACTORS WERE EXPORTED TO USA,THAT COMPLETE UNITS S OLD TO SAARC COUNTRIES, THAT THE US MARKET WAS HANDLED BY THE AE WHO WOULD INCUR SELLIN G AND PROMOTIONAL EXPENSES, THAT THERE WAS FUNCTIONAL DIFFERENCE IN THE US AND NON US MARK ET,THAT THE TPO HAD IGNORED THE CREDIT DIFFERENCE AND CAPACITY UTILIZATION ALSO,THAT THERE WAS SUBSTANTIAL DROP IN THE SALE OF TRACTORS, THAT THE ASSESSEE HAD APPLIED THE MARGINAL COSTING THEORY, THAT IT HAD RECEIVED RS.17.78 CRORES FROM THE AE,THAT US MARKETING WAS AT ARMS LENGTH,T HAT IT WAS A BUYERS MARKET, THAT THE TPO HAD NOT TAKEN INTO ACCOUNT THE FUNCTIONAL DISABILIT Y INVOLVED IN SALES TO THE AE WHICH WAS A FAIRLY LARGE SIZE DISTRIBUTOR BUYING BULK QUANTITIE S,THAT IT RESULTED IN DIFFERENTIAL COSTS OF SELLING AND DISTRIBUTION,THAT THE DEALERS IN OTHER COUNTRIES WERE NOT BUYING IN BULK AND THAT THEY WERE NOT REQUIRED TO INCUR COST OF SELLING/DIS TRIBUTION, THAT THERE PROFITABILITY WAS BOUND TO BE MORE, THAT THE TPO HAD NOT TAKEN COGNIGANCE O F THE FACT THAT FUNCTIONAL PROFILE OF THE ASSESSEE WAS NOT COMPARABLE WITH THE AE AND THE NON -AE, THAT THE FUNCTIONS ASSETS AND RISKS ASSUMED BY THE ASSESSEE WAS DIFFERENT WHILE TRANSAC TING WITH THE AE AND THE THIRD-PARTY DISTRIBUTORS, THAT THE BUSINESS WITH THE AE WAS AKI N TO A LICENSED MANUFACTURERS AS OPPOSED TO NON-AES BUSINESS THAT WAS SIMILAR TO A CONTRACT MA NUFACTURER, THAT WHILE TRANSACTING WITH THE AE THE ASSESSEE WOULD NOT BE OR ASSUME LIMITED RISK PERTAINING TO MARKET RISK CREDIT RISK OR INVENTORY RISK, THAT WITH THE NON-AES IT WOULD BE A SUBSTANTIAL PORTION OF MARKET/CREDIT/ INVENTORY RISKS,THAT THE CUMULATIVE UNITS OF TRACTO R SALES ACROSS ALL THE NON-AES WAS MUCH LOWER THAN THE UNITS EXPORTED TO THE AE, THAT THERE WERE SIGNIFICANT DIFFERENCES IN THE FUNC- TIONS,ASSETS AND THE RISKS PERTAINING TO THE CONTRO LLED AND UNCONTROLLED TRANSACTIONS, THAT THE TPO HAD CLUBBED SALES TO THE SAARC COUNTRIES FOR AR RIVING AT THE NET PROFIT TO COST RATIO, THAT THE US MARKET COULD NOT BE COMPARED WITH THE MARKET OF OTHER COUNTRIES, THAT THE TRANSACTIONS WITH THE NON-AE.S COULD NOT BE TREATED AS COMPARABL E WITH THE TRANSACTIONS OF THE AES, THAT THE DIFFERENCES WERE NOT AM UNABLE TO QUANTITATIVE ADJUSTMENTS. HE RELIED UPON THE CASE OF 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 7 WRIGLEY INDIA PRIVATE LTD.(ITA/5648-50/DEL/2012)AND STATED THAT GEOGRAPHICAL COMPARABILITY WAS AN IMPORTANT ASPECT WHILE SELECTING THE COMPARA BLES,THAT AS PER RULE 10 B (1)(C)(III)OF THE RULES ADJUSTMENTS WERE TO BE MADE FOR FUNCTIONAL AN D OTHER DIFFERENCES BETWEEN TRANSACTIONS AND ENTITIES,THAT INTERNAL TRANSACTIONAL NET MARGIN METHOD WAS AN INVALID APPROACH,THAT IT WAS MORE LOGICAL TO DETERMINE THE ALP TO EXTERNAL COMPA RABILITY ANALYSIS, THAT THE COMPARABLE SELECTED BY THE ASSESSEE WAS NEAREST AVAILABLE COMP ARABLE,THAT FUNCTION-AL,GEOGRAPHICAL AND ECONOMIC DIFFERENCES WERE HAVING MATERIAL BEARING O N THE PRICES,THAT METHOD ADOPTED BY THE TPO I.E. TNMM HAD TO BE REJECTED. HE REFERRED TO TH E NUMBER OF UNITS MANUFACTURED AND EXPORTED IN THE SUBSEQUENT YEARS AND ARGUED THAT MA RKET PENETRATION AND PRICING POLICIES OF THE ASSESSEE HAD WORKED IN FAVOUR OF THE ASSESSEE.H E FURTHER CONTENDED THAT THE ASSESSEE MIGHT HAVE SUFFERED LOSSES ON FULL COSTING BASIS BU T IT HAD MADE PROFITS ON MARGINAL COSTING BASIS, THAT ON US EXPORTS IT HAD MADE GROSS CONTRIB UTION OF RS. 17.78 CRORES WHICH RESULTED IN BETTER ABSORPTION OF FIXED COSTS,THAT COMMISSION PA ID BY THE ASSESSEE WAS AN ABNORMAL AND ADDITIONAL COST AND SHOULD NOT HAVE BEEN TAKEN INTO ACCOUNT FOR COMPUTING MARGINS,THAT THE ASSESSEE DID NOT STIPULATE THE PRICE AT WHICH THE A E WOULD SELL THE TRACTORS IN THE US MARKET, THAT NET PROFIT TO COST RATIO FOR EXPORT TO NON-US WAS 34.2%, THAT FOR THE USA IT WAS 25.17%. HE ALSO REFERRED TO PARAGRAPH 2.32,2.39, 2.4 1.3 AN D 1.31 OF THE TP GUIDELINES ISSUED BY OECD.REFERING TO PAGE NO.27 OF THE PB-1,HE CONTENDE D THAT TRACTORS WERE SOLD AT BEST AVAILABLE PRICE,THAT THE EFFECTIVE TAX RATE WAS 7.5 %, THAT AE WAS PAYING TAX AT 30.45%, THAT THE ASSESSEE WANTED PENETRATION IN THE US MARKET, T HAT IT SOLD MORE UNITS FOR THAT PURPOSE. THE DR STATED THAT THE ASSESSEE WAS PAYING 100 DOLL ARS FOR EACH TRACTOR SOLD IN US,THAT IT WAS A VARIABLE COST, THAT IT WAS NOT CONSIDERED BY THE ASSESSEE , THAT EVEN IF METHOD ADOPTED BY THE ASSESSEE WAS CORRECT AND VARIABLES WERE CONSIDERED THE TPO WAS AUTHORISED TO MAKE ADJUST - MENTS,THAT THE ASSESSEE DID NOT PRODUCE DOCUMENTS T O SUPPORT ITS CLAIM, THAT IT DID NOT EXPLAIN AS TO HOW THE DIFFERENCE IN VALUE WOULD AFFECT THE ALP,THAT GEOGRAPHICAL DISTANCES WERE NOT RELEVANT TO DECIDE THE ISSUE BEFORE THE TRIBUNAL,TH AT AS PER THE TP RULES ALP OF THE IT.S HAD TO BE DETERMINED . 4.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.BEFORE PROCEEDING FURTHERE,WE WOULD LIKE TO REFER TO THE P ROVISIONS OF RULE 10B OF THE RULES,WHEREIN THE PROCEDURE TO BE FOLLOWED FOR APPLYING CPM IS GI VEN.THE RELEVANT PART OF THE RULE READS AS FOLLOWS: '10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTI C TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS,BEING THE MOST APPROPRIATE METHOD , IN THE FOLLOWING MANNER, NAMELY : 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 8 XXXX (C)CPM BY WHICH, (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED TO AN ASSOCIATED E NTERPRISE, ARE DETERMINED ; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED E NTERPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTION,OR A NUMBER OF SUCH TRANSACTIONS, IS DE TERMINED ; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, IF AN Y, BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARAB LE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WH ICH COULD MATERIALLY AFFECT SUCH PROFIT MARK-UP IN THE OPEN MARKET ; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III) ; (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE ; FROM THE ABOVE,IT IS CLEAR THAT FOR APPLYING CPM CE RTAIN STEPS-DETERMINATION OF DIRECT AND INDIRECT COSTS,DETERMINATION OF GP MARK UP OF SUCH COSTS,COMPARING IT WITH UNRELATED ENTERPRISE IN A COMPARABLE UNCONTROLLED TRANSACTION ,ADJUSTMENT OF GP MARK UP-HAVE TO BE FOLLOWED. 4.5. WE FIND THAT THE ASSESSEE HAD ENTERED INTO FOUR IT. S,THAT IT CLAIMED THAT REIMBURSEMENT OF ADVERTISEMENT AND WARRANTY EXPENSE WERE ON ACTUAL B ASIS WITHOUT ANY MARKUP AND THAT SAME WERE AT ARMS-LENGTH,THAT THE CLAIM MADE BY THE AS SESSEE WAS ACCEPTED BY THE TPO FOR THOSE TWO TRANSACTIONS,THAT THE ASSESSEE HAD BENCH-MARKED THE IT.S BY APPLYING CPM,THAT IT WAS CLAIMED THAT IN VIEW OF LOWER DEMAND IN THE DOMEST IC SEGMENT IT HAD ADOPTED A BUSINESS STRATEGY OF EXPLORING FOREIGN MARKET,THAT IT SOLD 3 153 TRACTORS TO ITS AE IN US , THAT IT CLAIMED THAT UNITS SOLD IN USA WERE OF VERY LOW HORSEPOWER AND WERE DIFFERENT FROM THE TRACTORS SOLD IN THE DOMESTIC MARKET,THAT THE TRACTOR SOLD THROUG H SARC COUNTRIES WERE SIMILAR TO THOSE SOLD IN DOMESTIC MARKET,THAT AS PER THE ASSESSEE TH E EXPORT SALES WERE INITIATED BY IT AS PER THE REQUIREMENT OF THE US MARKET,THAT THE TP STUDY REPO RT WAS PREPARED ON THE BASIS OF MARGINAL COSTING METHODOLOGY OF OECD(PARA 2.4 OF TPGL),IN TH E TP STUDY REPORT THREE COMPANIES , NAMELY EICHER LIMITED,PUNJAB TRACTORS LTD. AND ESCO RTS LTD.,WERE SELECTED BY THE ASSESSEE AS COMPARABLES,THAT THE ASSESSEE CLAIMED THAT IT HAD M ARK UP OF 11.70% ON MARGINAL COST AND THE MEAN MARK UP OF THE COMPARABLES WAS 8.24%,THAT IT C LAIMED EXPORTS MADE BY IT TO THE AE WERE AT ARMS LENGTH,THAT THAT THE TPO HELD THAT TN MM WAS MOST APPROPRIATE METHOD TO DETERMINE THE ALP,THAT SHE SUGGESTED ADJUSTMENT OF RS. 6.75 CRORES,THAT THE FAA UPHELD THE ORDER OF THE TPO. 4.6. A PERUSAL OF THE ORDER OF THE TPO/CIT AND SUBMISSIO NS OF THE AO PROVE THAT AT THE TIME OF PASSING OF BOTH THE ORDERS THE ASSESSEE AS WELL AS DEPARTMENTAL AUTHORITIES WERE NOT QUITE 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 9 CLEAR ABOUT THE PROCEDURE TO BE FOLLOWED FOR DETERM INING THE ALP OF THE IT.S.BEING THE VERY FIRST YEAR OF TP PROVISIONS THERE WAS AMBIGUITY IN DETERMINING THE ALP AND IT WAS QUITE NATURAL.PERHAPS THAT IS THE REASON THAT PROMPTED TH E CBDT TO ISSUE CIRCULAR NO.12/2001 DTD.23.08.2001 AND IT READS AS UNDER: THE AFORESAID PROVISIONS HAVE BEEN ENACTED WITH TH E VIEW TO PROVIDE A STAY TO DELETE FRAMEWORK WHICH CAN LEAD TO COMPETITION OF REASONAB LE, FAIR AND EQUITABLE PROFIT AND TAX IN INDIA, SO THAT THE PROFITS CHARGEABLE TO TAX INDIA DO NOT GET DIVERTED SOMEWHERE ELSE BY ALTERING THE PRICES CHARGED AND PAID IN INTRAGROUP TRANSACTIONS LEADING TO EROSION OF OUR TAX REVENUES. IN THE INITIAL YEARS OF ITS IMPLEMENTATIO N, THERE MAY BE ROOM FOR DIFFERENT INTERPRETATIONS LEADING TO UNCERTAINTIES WITH REGAR D TO DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. WHILE IT WOULD BE NEC ESSARY TO PROTECT OUR TAX BASE, THERE IS A NEED TO ENSURE THAT TAXPAYERS ARE NOT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE REGULATIONS.( EMPHASIS ADDED) WE FIND THAT THE ASSESSEE HAD TREATED CPM AS MOST A PPROPRIATED METHOD,WHEREAS TPO APPLIED TNMM FOR BENCHMARKING THE IT.S.IT IS TRUE T HAT THE TPO IS AUTHORISED TO CHANGE THE METHOD FOR DETERMINING ALP OF IT.S,IF HE CAN POINT OUT THE DEFECTS IN THE METHOD ADOPTED BY AN ASSESSEE.IN THE CASE UNDER CONSIDERATION,WE DO N OT FIND ANY REASONED AND JUSTIFIABLE FINDING HAS BEEN GIVEN BY THE TPO FOR NOT FOLLOWING CPM.BUT,IT IS ALSO TRUE THAT THE ASSESSEE HAD NOT FOLLOWED ALL THE STEPS AS REQUIRED BY THE P ROVISIONS OF RULE 10B(C)OF THE RULES.IT IS SAID THAT THE OBJECT AND PURPOSE OF TP ADJUSTMENT I S TO ENSURE THAT THE CONTROLLED TAXPAYERS ARE GIVEN TAX PARITY WITH UNCONTROLLED TAXPAYERS BY DETERMINING THEIR TRUE TAXABLE INCOME. COSTS OR EXPENSES INCURRED FOR SERVICES PROVIDED OR IN RESPECT OF PROPERTY TRANSFERRED,WHEN MADE SUBJECT MATTER OF THE ALP BY APPLYING THE CPM, CANNOT BE AGAIN FACTORED OR INCLUDED AS A PART OF INTERCONNECTED INTERNATIONAL TRANSACTION AND SUBJECTED TO THE ALP,ONCE IT HAS BEEN CONSIDERED AS PER SUB RULE (C)(I).IT IS FOUND THAT THE TPO HAS NOT GIVEN DUE ATTENTION TO THE FUNCTIONAL PROFILES OF THE ASSESSEE AS WELL AS OF T HE AE/NON-AE.S.BUSINESS TRANSACTION WITH THE AE WERE NOT AT THE SAME FOOTING THAT OF THE NON AE ENTITIES.BESIDES,THAT WITH THE NON- AE.S IT HAD TO TAKE MARKET RISK,CREDIT CREDIT RISK AND INVENTORY RISK.WE FIND THAT THE TPO HAD CLUBBED SALES TO THE SAARC COUNTRIES FOR ARRIVING A T THE NET PROFIT TO COST RATIO.BUT,IN OUR OPINION,TRANSACTIONS WITH AE SHOULD NOT HAVE BEEN C OMPARED WITH THE SAARC COUNTRIES TRANSACTIONS.IN SHORT,THE DEPARTMENTAL AUTHORITIES AS WELL AS THE ASSESSEE HAD NOT FOLLOWED THE PROPER METHOD TO BENCHMARK THE IT.S ENTERED IN TO,D URING THE YEAR UNDER CONSIDERATION,BY THE ASSESSEE.BEING THE FIRST YEAR OF TP ADJUSTMENT,IT W AS NATURAL. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT MA TTER NEEDS FURTHER VERIFICATION OF FACTS AND APPLICATION OF THE PROVISIONS OF LAW WHICH ARE VERY CLEAR AS ON TODAY.THE CONFUSION OR AMBIGUITY ABOUT APPLYING THE METHOD OR PROCEDURE IS OVER AND ORDERS OR HIGHER JUDICIAL 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 10 AUTHORITIES ARE AVAILABLE AS TO HOW TO APPLY CPM.TH EREFORE,WE ARE RESTORING BACK THE MATTER TO THE FILE OF THE TPO/AO FOR FRESH ADJUDICATION.HE IS DIRECTED TO AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AND TO CONSI DER THE CIRCULAR WHILE DECIDING THE APPEAL FOR THE YEAR UNDER CONSIDERATION.GROUND NO.1,RAISED BY THE ASSESSEE,IS PARTLY ALLOWED. 5. SECOND GROUND OF APPEAL,FOR THE AY.2002-03,IS ABOUT WRITING OFF OF RS. 28.06 LAKHS, UNDER THE HEAD CAPITAL ADVANCES.DURING THE ASSESSMENT PRO CEEDINGS, THE AO FOUND THAT THE AUDITORS IN THE TAX AUDIT REPORT HAD SHOWN CERTAIN ITEMS AS EXPENSES OF CAPITAL NATURE DEBITED IN THE PROFIT AND LOSS ACCOUNT AS REVENUE EXPENSES,THAT TH E AUDITORS IDENTIFIED SUCH EXPENSES TO THE TUNE OF RS.4.65 CRORES,THAT THE ASSESSEE ITSELF HAD TREATED EXPENSES OF RS. 4.37 CRORE AS CAPITAL EXPENDITURE, THAT IT HAD CLAIMED DEPRECIATION ON SU CH EXPENDITURE. HE FURTHER FOUND THAT ASSESSEE HAD CLAIMED THAT RS. 28,06,186/-WERE PART OF GENERAL AND MISCELLANEOUS WRITE-OFF OF THE CAPITAL ADVANCES RELATING TO TRACTOR DIVISION L OCATED AT KANDIVALI. IT WAS ARGUED BEFORE THE AO THAT IN VIEW OF THE SAID SUM BEING ADVANCE FOR D EVELOPMENT OF COOLING IN THE HONORABLE COURSE OF BUSINESS, THE SAME WAS ALLOWABLE AS DEDUC TION U/S. 37 (1)/35 (1) OF THE ACT. HOWEVER, THE AO HELD THAT ADVANCES TO TRACTOR DIVIS ION WAS A CAPITAL EXPENDITURE, THAT THE TRANSACTION HAD NO INCIDENCE ON THE PROFIT AND LOSS ACCOUNT, THAT THE MISCELLANEOUS WRITE-OFF WAS NOT ALLOWABLE. FINALLY, HE MADE A DISALLOWANCE OF RS. 28.06 LAKHS. 5.1 . AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PR EFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA)AND MADE SUBMISSIONS. AFTE R CONSIDERING THE AVAILABLE MATERIAL, HE HELD THAT DISPUTED AMOUNT HAD BEEN CLASSIFIED AS CAPITAL EXPENDITURE BY THE AUDITORS, THAT THE CONTENTION OF THE ASSESSEE THAT SUCH AMOUNT REP RESENTED ADVANCES GIVEN IN THE NORMAL COURSE OF BUSINESS COULD NOT BE ACCEPTED IN VIEW OF THE AUDITORS REPORT. HE CONFIRMED THE ORDER OF THE AO. 5.2 .DURING THE COURSE OF HEARING BEFORE US,THE AR CONT ENDED THAT THE ADVANCES WERE GIVEN TO VARIOUS PARTIES IN THE ORDINARY COURSE OF BUSINESS IN THE EARLIER YEARS, THAT ADVANCES BECAME IRRECOVERABLE,THAT SAME WERE WRITTEN OFF DURING THE YEAR UNDER CONSIDERATION, THAT THE ADVANCES WERE MADE FOR DEVELOPMENT OF TOOLING AND R ELATED TO THE TRACTOR DIVISION OF KANDIVILI UNIT.HE REFERRED TO THE ORDER OF THE TRIB UNAL FOR THE AY.1999-00(SUPRA),WHEREIN THE ISSUE OF WRITING OFF OF FOUNDRY EXPENSES AT BARAMAT I WAS DELIBERATED UPON.THE DR STRONGLY SUPPORTED THE ORDER OF THE FAA AND STATED THAT AMOU NT IN QUESTION WAS A CAPITAL EXPENDITURE. 5.3 .WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT T HE TRIBUNAL HAD DEALT WITH THE ISSUE OF WRITING OFF OF FOUNDRY EXPENSES AT BARAMATI AS UNDE R: 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 11 2.2. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA). BEFORE HIM, IT WAS CONTE NDED THAT EXPENDITURE WAS INCURRED IN THE COURSE OF CARRYING ON OF BUSINESS,THAT THE FOUNDRY FORMED PART OF EXISTING BUSINESS OF THE ASSESSEE , THAT THE ENTIRE EXPENDITURE SHOULD BE AL LOWED AS REVENUE EXPENDITURE/BUSINESS LOSS NOTWITHSTANDING THE FACT THAT THE FOUNDRY PROJECT W AS ABANDONED, THAT FOUNDRY WAS ESSENTIAL FOR MANUFACTURING COMPONENTS FOR VEHICLES AND TRACT ORS, THAT THE ASSESSEE HAD FOUNDRIES AT ITS EXISTING PLANTS, THAT THE PROJECT FOR SETTING U P ADDITIONAL FOUNDRY WAS IN THE COURSE OF EFFICIENTLY CARRYING OUT ITS EXISTING BUSINESS, THA T SUCH WRITE OFF HAD TO BE ALLOWED AS DEDUCTION U/S. 37(1) OF THE ACT. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBM ISSION OF THE ASSESSEE,THE FAAHELD THAT THE EXPENDITURE WAS INCURRED FOR SETTING UP OF FOU NDRY AT BARAMATI, THAT IF THE FOUNDRY HAD IN FACT BEEN SUCCESSFULLY BEEN SET UP THE WHOLE OF THE EXPENDITURE WOULD HAVE BEEN TREATED AS COST OF ACQUIRING A FIXED ASSET.THE FAA REFERRED TO CASE OF FANCY CORPN.LTD.(162 ITR 827) AND HELD THAT SETTING UP OF FOUNDRY WAS ESSENTIAL F OR CARRYING ON BUSINESS OF THE ASSESSEE AND INTENTION OF THE ASSESSEE WAS NOT RELEVANT OR DETE RMINATIVE FACTOR TO DECIDE THE ISSUE.FINALLY,HE UPHELD THE ORDER OF THE AO. 2.3. BEFORE US THE AUTHORISED REPRESENTATIVE (AR) STATED THAT RATIO OF FANCY CORPN.LTD.RELIED UPON BY THE FAA WAS NOT APPLICABLE TO THE FACTS OF THE CASE,THAT SECTION 115JA OF THE ACT DID NOT DISTINGUISH BETWEEN DEBIT TO P&L A/C. OF REVENU E NATURE AND OF CAPITAL NATURE, THAT THERE WAS A DIFFERENCE BETWEEN CAPITAL EXPENDITURE(SEC.37 )AND BUSINESS LOSS(SEC.28)OF THE ACT.HE REFERRED TO THE PAGES 2-5 OF THE PAPER BOOK.DEPARTM ENTAL REPRESENTATIVE(DR) SUPPORTED THE ORDER OF THE FAA 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD INITIATED SETTING UP OF A FOUNDRY AT B ARAMATI AND LATER ON FINDING THE PROJECT UN- ECONOMICAL SHELVED THE PROJECT,THAT THE FAA DISALLO WED THE EXPENDITURE CLAIMED BY THE ASSESSEE ON THE GROUND THAT THE FOUNDRY HAD NOT BEE N SUCCESSFULLY SET UP.IN OUR OPINION,THE INSTALLATION OF FOUNDRY CANNOT BE TAKEN AS A PRE-CO NDITION FOR ALLOWING/DISALLOWING THE CLAIM OF AN EXPENDITURE.WHAT HAS TO BE SEEN IS THE REAL N ATURE OF THE TRANSACTION.FOUNDRY WAS AN EXTENSION OF THE BUSINESS OF THE ASSESSEE AND DIREC TLY RELATED WITH ITS BUSINESS.CONSIDERING UNVAIBILITY OF A PROJECT,IF AN ASSESSEE DROPS THE I T, THEN IT WOULD NOT DISENTITLE HIM FROM CLAIMING THE EXPENDITURE INCURRED FOR SUCH ABORTED PROJECT. IN THE CASE BEFORE US,THE EXPENDITURE WAS NOT INCURRED FOR A NEW PROJECT OR N EW PRODUCT TOTALLY DISCONNECTED WITH THE BUSINESS ACTIVITIES OF THE ASSESSEE.THE ASSESSEE FO UND THAT SETTING UP OF A FOUNDRY AT BARAMATI WOULD NOT BE A PROFITABLE VENTURE,SO,IT DECIDED TO DISCONTINUE IT.IT WAS A PURELY A COMMERCIAL DECISION AND EVERY ASSESSEE HAS A RIGHT TO MANAGE H IS AFFAIRS IN THE MANNER HE WANTS.UNTIL AND UNLESS HE DOES NOT VIOLATES THE PROVISIONS OF T HE ACT,HE CAN CARRY ON HIS BUSINESS AND INCUR EXPENDITURE.THE AO AND THE FAA HAVE NOT DOUBT ED THE GENUINENESS OF THE EXPENDITURE. CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE,WE ARE REVERSING THE ORDER OF THE FAA AND DECIDE GROUND NO.1 IN FAVOUR OF THE ASS ESSEE. WE ARE OF THE OPINION THAT THE BASIC ANALOGY FOR AL LOWING WRITE-OFF IS TO CONSIDER THE REAL NATURE OF THE TRANSACTION.THE ADVANCES WERE MADE FO R THE RUNNING OF BUSINESS.THE EXPENDI - TURE WAS NOT INCURRED FOR A NEW PROJECT, NEITHER IT WAS TOTALLY DISCONNECTED WITH THE BUSINESS ACTIVITIES CARRIED OUT BY THE ASSESSEE.THE DISPUTED AMOUNT WAS ADVANCED FOR TRACTOR DIVISON OF THE ASSESSEE IN THE NORMAL COURSR OF BUSINESS.THERE FORE,FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL,WE DECIDE GROUND NUMBER TWO IN FAVOUR OF T HE ASSESSEE. 6. GROUND NUMBER 16 DEALS WITH ADDITION OF PROVISION F OR DOUBTFUL DEBTS, U/S.115JB OF THE ACT,AMOUNTING TO RS.6.16 CRORES.THE AR FAIRLY CONSI DERED THAT THE ISSUE HAD TO BE DECIDED 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 12 AGAINST THE ASSESSEE,BECAUSE OF THE RETROSPECTIVE A MENDMENT TO THE SECTION.ACCORDINGLY, WE DISMISS GROUND. 7. LAST GROUND OF APPEAL IS ABOUT ADDITION OF PROVISIO N FOR WARRANTY, U/S. 115 JB OF THE ACT, OF RS.14.75 CRORES.DURING THE ASSESSMENT PROCEEDINGS,T HE AO CALLED FOR DETAILS ABOUT PROVISIONS FOR CONTINGENCY,AMOUNTING TO RS. 480.20 LAKHS. THE ASSESSEE EXPLAINED THAT THE AMOUNT IN QUESTION REPRESENTED PROVISIONS MADE FOR LABOUR DEM ANDS UNDER NEGOTIATIONS DURING THE YEAR UNDER APPEAL, THAT THE PROVISIONS WAS MADE BASED ON MERCANTILE SYSTEM OF ACCOUNTING, THAT PROVISIONS FOR WARRANTY EXPENDITURE WAS ASCERTAINED ON THE BASIS OF ACTUAL EXPENSES. HOWEVER, THE AO HELD THAT THE PROVISIONS OF CONTING ENCY AND THE PROVISIONS FOR WARRANTY HAD TO BE CONSIDERED WHILE COMPUTING THE INCOME UNDER T HE MAT PROVISIONS,, BOTH THE ITEMS REPRESENTED AN ASCERTAINED LIABILITIES.AS A RESULT, HE MADE ADDITIONS OF RS.18.55 CRORE TO THE INCOME OF THE ASSESSEE. 7.1. DURING THE APPELLATE PROCEEDINGS,THE FAA,AFTER CONS IDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER,HELD THAT THE PRO VISIONS FOR CONTINGENCY OF RS. 480.20 LAKHS HAD TO BE ALLOWED. WITH REGARD TO THE PROVISI ONS MADE BY THE ASSESSEE TOWARD WARRANTY HE HELD THAT THE PROVISION MADE BY IT WAS CONTINGEN T IN NATURE, THAT THE PROVISION WAS NOT BASED ON ANY SCIENTIFIC/HISTORICAL DATA. HE CONFIRM ED THE ADDITION OF RS. 14.75 CRORE. 7.2. BEFORE US, THE AR STATED THAT THE PROVISIONS WERE A SANTE ON THE BASIS OF EMPIRICAL ANALYSIS, THAT THE ASSESSEE USED THE HISTORICAL DAT A BASE FOR ARRIVING AT THE WARRANTY EXPENDI - TURE,THAT THE PROVISION FOR WARRANTY EXPENSES ON TH E VEHICLES/TRACTORS SOLD DURING THE YEAR WAS ASCERTAINED ON THE BASIS OF ACTUAL EXPENSES INCURRE D ON SETTLEMENT OF WARRANTY CLAIMS IN THE EARLIER YEARS AND THE ACTUAL SALES MADE DURING THE YEAR, THAT SUCH PROVISIONS WERE NECESSARY TO ARRIVE AT THE ON THE BASIS OF MATCHING CONCEPT THAT PROVISION FOR WARRANTY HAD BEEN ALLOWED AS DEDUCTION BY THE TRIBUNAL WHILE DECIDING THE APPEAL FOR THE ASSESSMENT YEAR 1989 90, THAT THE PROVISION FOR WARRANTY WAS AN ASCERTAINED LIABI LITY. HE REFERRED TO THE CASE OF APOLLO TYRES LTD. (255 ITR 273). THE DR SUPPORTED THE ORDE R OF THE FAA AND STATED THAT HE HAD ALREADY ALLOWED THE PROVISION MADE FOR THE LABOUR D EMAND, THAT PROVISION FOR WARRANTY WAS NOT AN ASCERTAINED LIABILITY. 7.3. WE HAVE HEARD THE RIVAL SUBMISSIONS. BEFORE PROCEED ING FURTHER, WE WOULD LIKE TO REFER TO THE CASE OF LUK INDIA PRIVATE LTD.(347 ITR 674)THE HONBLE MADRAS HIGH COURT WHEREIN IT HAS DEALT WITH THE ISSUE OF PROVISION FOR WARRANTY VIS--VIS CALCULATION UNDER THE MAT PROVISIONS.WE ARE REPRODUCING THE JUDGMENT OF THE H ONORABLE COURT.PARAGRAPH 5 OF THE 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 13 JUDGMENT CONTAINS THE FACTS OF THE CASE,AS NOTED BY THE TRIBUNAL. THE JUDGMENT READS AS UNDER: THE REVENUE HAS COME FORWARD WITH THESE APPEALS RA ISING THE FOLLOWING SUBSTANTIAL QUESTIONS OF LAW : '1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT THE PR OVISION FOR WARRANTY WAS AN ALLOWABLE DEDUCTION, EVEN THOUGH THE PROVISION HAD NOT BEEN MADE ON ANY SCIENTIFIC BASIS ENSURING A FAIR DEGREE OF ACCURACY, THEREBY R ESULTING IN HUGE DEFERMENT OF REVENUE AND TAX LIABILITY THEREON ? 2. FOR THE ASSESSMENT YEAR 2003-04 AND 2004-05 : WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE INCOME-TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT THE PROVISION MA DE BY THE ASSESSEE SHOULD BE ALLOWED AS A DEDUCTION FOR THE PURPOSE OF SECTION 1 15JB OF THE INCOME-TAX ACT EVEN THOUGH SUCH PROVISION HAS NOT BEEN MADE ON ANY SCIE NTIFIC BASIS AND HUGE EXCESS PROVISION HAD BEEN MADE RESULTING IN DEFERMENT OF R EVENUE ?' 2. THE QUESTION CONCERNS THE PROVISION FOR WARRANTY CLAIMS MADE AND IT IS ALLOWABLE. 3. MR. K. SUBRAMANIAN, LEARNED SENIOR STANDING COUN SEL FOR THE APPELLANT, VEHEMENTLY CONTENDED THAT NO SCIENTIFIC METHOD WAS ADOPTED BY THE RESPONDENT-ASSESSEE WHILE MAKING THE PROVISION FOR WARRANTY CLAIMS AND,THEREFORE, THE TR IBUNAL WENT WRONG IN ALLOWING THE SAID DEDUCTION. LEARNED STANDING COUNSEL, HOWEVER, FAIRL Y BROUGHT TO OUR NOTICE A RECENT DECISION OF THE HON'BLE SUPREME COURT REPORTED IN ROTORK CON TROLS INDIA PVT. LTD. V. CIT [2009] 314 ITR 62 (SC), WHEREIN THE HON'BLE SUPREME COURT DEAL T WITH THIS ISSUE IN DEPTH AND HAS LAID DOWN THE PRINCIPLES WHILE EXAMINING A CLAIM FOR WAR RANTY PROVISION BY WAY OF ALLOWABLE DEDUCTION. PARAGRAPH 14 OF THE SAID DECISION, WHERE THE PRINCIPLE HAS BEEN LAID DOWN, READS AS UNDER (PAGES 72 AND 73) : 'IN THIS CASE, WE ARE CONCERNED WITH PRODUCT WARRAN TIES. TO GIVE AN EXAMPLE OF PRODUCT WARRANTIES, A COMPANY DEALING IN COMPUTERS GIVES A WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS THE FOLLOWING OPTIONS : (A) ACCOUNT FOR WAR RANTY EXPENSE IN THE YEAR IN WHICH IT IS IN CURRED ; (B) IT MAKES A PRO VISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM ; AND (C) IT PROVIDES FOR WARRANTY AT 2 PER CENT. OF TURNOVER OF THE COMPANY BASED ON PAST EXPE RIENCE (HISTORICAL TREND). THE FIRST OPTION IS UNSUSTAINABLE SINCE IT WOULD TANTAMOUNT T O ACCOUNTING FOR WARRANTY EXPENSES ON CASH BASIS, WHICH IS PROHIBITED BOTH UNDER THE COMP ANIES ACT AS WELL AS BY THE ACCOUNTING STANDARDS WHICH REQUIRE ACCRUAL CONCEPT TO BE FOLLOWED. IN THE PRESENT CASE, THE DEPARTMENT IS INSISTING ON THE FIRST OPTION WHI CH, AS STATED ABOVE, IS ERRONEOUS AS IT RULES OUT THE ACCRUAL CONCEPT. THE SECOND OPTION IS ALSO INAPPROPRIATE SINCE IT DOES NOT REFLECT THE EXPECTED WARRANTY COSTS IN RESPECT OF R EVENUE ALREADY RECOGNIZED (ACCRUED). IN OTHER WORDS, IT IS NOT BASED ON THE MATCHING CONCEP T. UNDER THE MATCHING CONCEPT, IF REVENUE IS RECOGNIZED THE COST INCURRED TO EARN THA T REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED FOR. WHEN VALVE ACTUATORS ARE SOLD AND THE WARRANTY COSTS ARE AN INTEGRAL PART OF THAT SALE PRICE THEN THE APPELLANT HAS TO PROVIDE FOR SUCH WARRANTY COSTS IN ITS ACCOUNT FOR THE RELEVANT YEAR, OTHERWISE THE MA TCHING CONCEPT FAILS. IN SUCH A CASE THE SECOND OPTION IS ALSO INAPPROPRIATE. UNDER THE CIRC UMSTANCES, THE THIRD OPTION IS THE MOST APPROPRIATE BECAUSE IT FULFILS ACCRUAL CONCEPT AS W ELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HIS TORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNT ING SYSTEM FOR CAPTURING THE RELATIONSHIP B ETWEEN THE NATURE OF THE SALES, THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES IN CURRED AGAINST IT SUBSEQUENTLY. THUS, THE DECISION ON THE WARRANTY PROVISION SHOULD BE BA SED ON PAST EXPERIENCE OF THE COMPANY. A DETAILED ASSESS MENT OF THE WARRANTY PRO VISIONING POLICY IS REQUIRED PARTICULARLY IF THE EXPERIENCE SUGGESTS THAT WARRAN TY PROVISIONS ARE GENERALLY REVERSED IF THEY REMAINED UNUTILISED AT THE END OF THE PERIOD P RESCRIBED IN THE WARRANTY.THEREFORE, THE COMPANY SHOULD SCRUTINISE THE HISTORICAL TREND OF W ARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT. ON THIS BASIS A SENSI BLE ESTIMATE SHOULD BE MADE. THE WAR 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 14 RANTY PROVISION FOR THE PRODUCTS SHOULD BE BASED ON THE ESTIMATE AT THE YEAR END OF FUTURE WARRANTY EXPENSES. SUCH ESTIMATES NEED REASSESS MEN T EVERY YEAR. AS ONE REACHES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBABILITY THA T THE WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERABLY REDUCED AND THAT SHOULD BE REFLECTE D IN THE ESTIMATION AMOUNT. WHETHER THIS SHOULD BE DONE THROUGH A PRO RATA REVERSAL OR OTHERWISE WOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WARRANTY PROVISIONS ARE BASED ON EXPERIENCE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST THEN THE QUESTION OF REVER SAL IN THE SUBSEQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, PROVISION FOR WAR RANTY IS RIGHTLY MADE BY THE APPELLANT- ENTERPRISE BECAUSE IT HAS INCURRED A PRESENT OBLIGA TION AS A RESULT OF PAST EVENTS. THERE IS ALSO AN OUTFLOW OF RESOURCES. A RELIABLE ESTIMATE O F THE OBLIGATION WAS ALSO POSSIBLE. THEREFORE, THE APPELLANT HAS INCURRED A LIABILITY, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, DURING THE RELEVANT ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE 1961 ACT. THEREFORE, ALL THE THREE CONDIT IONS FOR RECOGNISING A LIABILITY FOR THE PURPOSES OF PROVISIONING STANDS SATISFIED IN THIS C ASE. IT IS IMPORTANT TO NOTE THAT THERE ARE FOUR IMPORTANT ASPECTS OF PROVISIONING. THEY AREPR OVISIONING WHICH RELATES TO THE PRESENT OBLIGATION, IT ARISES OUT OF OBLIGATING EVE NTS, IT INVOLVES OUTFLOW OF RESOURCES AND, LASTLY, IT INVOLVES RELIABLE ESTIMATION OF OBLIGATI ON. KEEPING IN MIND ALL THE FOUR ASPECTS, WE ARE OF THE VIEW THAT THE HIGH COURT SHOULD NOT T O HAVE INTERFERED WITH THE DECISION OF THE TRIBUNAL IN THIS CASE.' 4. A PERUSAL OF THE PRINCIPLES STATED THEREIN SHOWS THAT WHILE THERE COULD BE THREE BROAD OPTIONS AVAILABLE TO A COMPANY WHILE MAKING A PROVI SION, VIZ., (A) ACCOUNT FOR WARRANTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED ; (B)IT MAKES A PROVISION FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM ; AND (C) IT PROVIDES FO R WARRANTY AT 2 PER CENT. OF THE TURNOVER OF THE COMPANY BASED ON PAST EXPERIENCE (HISTORICAL TR END), THE HON'BLE SUPREME COURT WHILE HOLDING THE FIRST TWO OPTIONS WOULD NOT BE APPROPRI ATE, THE THIRD OPTION WOULD BE MORE APPROPRIATE AS THAT WOULD FULFIL THE ACCRUAL CONCEP T AS WELL AS THE MATCHING CONCEPT. THE HON'BLE SUPREME COURT APPRECIATED THE DECISION OF T HE COMPANY THAT WHILE MAKING A WARRANTY PROVISION BASED ON PAST EXPERIENCE OF THE COMPANY, IT HELD THAT THERE SHOULD BE A WARRANTY PROVISIONING POLICY BASED ON A SCIENTIFIC METHOD AND THAT IF SUCH PROVISIONS ARE MADE ON EXPERIENCE AND HISTORICAL TREND AND IF THE WORKING IS ROBUST, THEN THE QUESTION OF REVERSAL IN THE SUBSEQUENT TWO YEARS, IN THE SAID C ASE, MAY NOT ARISE SIGNIFICANTLY. THE FOUR IMPORTANT ASPECTS OF PROVISIONING HAVE ALSO BEEN HI GHLIGHTED BY THE HON'BLE SUPREME COURT AND KEEPING THOSE ASPECTS IN MIND, WHEN A CASE IS A NALYSED AND THE FACTS INVOLVED THEREIN SATISFIED THOSE PRINCIPLES, NO INTERFERENCE SHOULD BE MADE. 5. KEEPING THE ABOVE LEGAL PRINCIPLES IN MIND, WHEN WE EXAMINE THE ORDER OF THE TRIBUNAL IMPUGNED IN THESE APPEALS AND THE QUESTIONS OF LAW RAISED BEFORE US, WE FIND THAT THE TRIBUNAL HAS IN EFFECT APPLIED THE PRINCIPLES AND HAS HELD T HAT THE ASSESSEE HEREIN MADE A SCIENTIFIC APPROACH WHILE MAKING A PROVISION FOR WARRANTY ACCO UNT FOR THE RELEVANT YEARS AND, THEREFORE, THERE WAS NO SCOPE TO DISALLOW THE CLAIM MADE BY THE ASSESSEE. THE ASSESSMENT YEARS RELATED TO 1999-2000 TO 2004-2005. BEFORE THE TRIBUNAL, ON BEHALF OF THE ASSESSEE, THE PROVISIONS FOR WARRANTY MADE IN THE BOOKS OF ACCOUN T AND THE ACTUAL SETTLEMENTS OF WARRANTY CLAIMS FOR THE ASSESSMENT YEARS 1997-98 TO 2009-10 WERE FURNISHED AND THE SAME HAS BEEN SET OUT IN PARAGRAPH 7. SIMILARLY, THE DETAILS OF THE Y EAR-WISE SALES AND THE PERCENTAGE, AT WHICH THE QUANTUM OF PROVISION FOR WARRANTY WAS WORKED OU T IN EACH YEAR BY THE ASSESSEE-COMPANY WERE ALSO FURNISHED. AFTER REFERRING TO THOSE FIGUR ES FURNISHED IN THE FORM OF STATEMENTS AND AFTER CONSIDERING THE STAND OF THE REVENUE AS WELL AS THE ASSESSEE, THE TRIBUNAL HAS RENDERED ITS FINDING AS UNDER IN PARAGRAPH 11. '11. IT IS SEEN FROM THE CHART REPRODUCED IN PARAGR APH (8) ABOVE THAT THE MULTIPLYING FACTOR WAS 3.99 IN THE ASSESSMENT YEAR 2002-03 AND THAT IT CAME DOWN TO 0.67 IN 2007-08. SINCE THE BASIS OF COMPUTATION IS THE AVER AGE OF THE IMMEDIATELY PRECEDING THREE YEAR'S ACTUAL SETTLEMENTS, THE ACCUMULATED CR EDIT BALANCE IN THE 'PROVISION FOR WARRANTY ACCOUNT' WILL BECOME SELF-LIMITING, AS CAN BE SEEN FROM THE CHART IN PARAGRAPH (8) ABOVE. FOR THE ASSESSMENT YEAR 2007-0 8, THE SALE WAS MORE THAN THREE TIMES THE SALE FOR THE ASSESSMENT YEAR 2002-03, WHE REAS THE PROVISION FOR WARRANTY 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 15 WAS ABOUT ONE-HALF. FURTHER, THE GENUINENESS OF THE FIGURES OF THE ACTUAL SETTLEMENTS HAS NOT BEEN DOUBTED BY THE ASSESSING OFFICER. IN V IEW OF THESE FACTS, THE METHOD OF COMPUTATION ADOPTED BY THE ASSESSEE CANNOT BE SAID TO BE ARBITRARY AND, THEREFORE, WE SEE NO REASON TO INTERFERE WITH THE CONCLUSIONS REA CHED BY THE COMMISSIONER OF INCOME-TAX (APPEALS). HIS ORDERS FOR THE ASSESS MEN T YEARS 1999-2000 TO 2002-03 ARE, ACCORDINGLY CONFIRMED.' 6. WE ALSO PERUSED THE STATEMENTS, WHICH HAVE BEEN EXTRACTED BY THE TRIBUNAL IN ITS ORDER IN PARAGRAPHS 7 AND 8. IN FACT, ON BEHALF OF THE ASSES SEE, A CATEGORIC STAND WAS MADE THAT THE ASSESSEE WAS MAKING A REASONABLE ESTIMATE OF THE PR OVISION FOR WARRANTY CLAIMS AND THAT IT WAS CONSISTENTLY ADOPTING A METHOD OF TAKING THE AV ERAGE OF ACTUAL SETTLEMENTS OF THE SUCH IMMEDIATELY PRECEDING THREE YEARS WHILE WORKING OUT THE PROVISION BASED ON THE PERCENTAGE OF CURRENT YEAR'S SALES. 7. HAVING REGARD TO THE FIGURES FURNISHED AND THE C LAIM THAT A SCIENTIFIC APPROACH WAS MADE WHILE MAKING A PROVISION FOR WARRANTY CLAIM, WHICH WAS BASED ON THE AVERAGE OF THE PREVIOUS YEARS' WARRANTY SETTLEMENTS, IT CANNOT BE HELD THAT THERE WAS ANY ERROR, MUCH LESS AN ILLEGAL ERROR COMMITTED BY THE TRIBUNAL WHILE PASSING THE I MPUGNED ORDER. IN FACT, A CURSORY GLANCE OF THE FIGURES SET OUT IN THE STATEMENTS IN PARAGRA PHS 7 AND 8 DISCLOSE THAT DEPENDING UPON THE TREND OF WARRANTY SETTLEMENTS OVER A PERIOD OF TIME CORRESPONDING TO THE SALES FIGURES, THE PERCENTAGE OF PROVISIONS MADE WAS NOT INCONSISTENT AND AS RIGHTLY HELD BY THE TRIBUNAL, THERE WAS NO ARBITRARY APPROACH MADE BY THE ASSESSEE WHIL E MAKING THE PROVISION FOR WARRANTY CLAIMS. THEREFORE, LOOKED AT FROM ANY ANGLE, WE DO NOT FIND ANY FLAW IN THE ORDER OF THE TRIBUNAL IN HAVING DECIDED TO CONFIRM THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) FOR THE RELEVANT YEARS. WE ARE, THEREFORE, NOT INCL INED TO ENTERTAIN THE APPEALS, AS WE DO NOT FIND ANY QUESTION OF LAW, MUCH LESS SUBSTANTIAL QUE STION OF LAW ARISING IN THESE APPEALS. THESE APPEALS FAIL AND THE SAME ARE DISMISSED. NO COSTS. CONSEQUENTLY, M.P. NOS. 1 OF 2010 (5 PETITIONS) ARE ALSO DISMISSED. NOW,COMING BACK TO THE FACTS OF THE CASE,IT IS FOUN D THAT IN THE AY.1989-90, THE AO HAD CONSIDERED PROVISION FOR WARRANTY AS AN AND ADMISSI BLE EXPENDITURE ON THE GROUND THAT SUCH PROVISIONS WAS IN THE NATURE OF CONTINGENT LABILITY , THAT IN THE SUBSEQUENT ASSESSMENT YEARS HE CONSIDERED THE ENHANCED PORTION OF WARRANTY PROVISI ONS AS THIS ALLOWABLE EXPENDITURE, THAT THE TRIBUNAL HAS REVERSE THE ORDER OF THE DEPARTMEN TAL AUTHORITIES, WHILE DECIDING THE APPEAL FOR THE AY.S 1989-90 TO 1991-92,THAT THE TRIBUNAL H AD HELD THAT PROVISION FOR WARRANTY WAS NOT CONTINGENT LABILITY, THAT THE FAA, WHILE DECIDI NG THE APPEAL FOR THE AY.1997-98, HAD ALLOWED THE CLAIM MADE BY THE ASSESSEE IN RESPECT O F PROVISIONS FOR WARRANTIES.IF WE CONSIDER THE PRINCIPLES LAID DOWN BY THE HONORABLE SUPREME C OURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD.(SUPRA),THEN IT BECOMES CLEAR THAT T HE ASSESSEE HAD FOLLOWED A SCIENTIFIC METHOD AND HAD CONSIDERED THE HISTORICAL DATA TO ARRIVE AT THE CORRECT BOOK PROFIT,AS PER THE PROVISIONS OF SECTION 115 JB OF THE ACT. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E ORDER OF THE FAA CANNOT BE ENDORSED. SO,REVERSING THE SAME,WE DECIDE THE LAST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. ITA/6961/MUMBAI/2012 -AY. 2003-04: 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 16 8. THE AR AND THE DR AGREED THAT GS.AO 1, 3, 11 AND 12 OF THE APPEAL FILED BY THE ASSESSEE, WERE TO BE ADJUDICATED, THAT REST OF THE GROUNDS ST OOD DECIDED BY THE ORDERS OF THE TRIBUNAL FOR THE AY.S 2006 -07 (ITA/8597/ MUM/2010),1999-200 0,2000-01 AND 2001- 02(SUPRA). GOA ISSUE ISSUE COVERED IN FAVOUR /AGAINST ASSESSEE 2. EXPENDITURE ON PAYMENT TO CLUBS RS. 39.83 LAKH S FAVOUR 3.A. CAPITAL EXPENDITURE DEBITED TO P&L ACCOUNT R S.6.12 LAKHS REPRESENTING FOREIGN TRAVEL EXPENSES IN CONNE CTION WITH THE ACQUISITION WHICH DID NOT MATERIALIZE AGAINST 4. DEVELOPMENT EXPENSES-HORIZON II AND IV PROJECT EXPENSES-TRACTOR DIVISION- RS. 6.14 CRORE (INCLUDIN G STAFF COST, MATERIAL OF RS. 5.30 CRORES DEALT WITH SEPARA TELY . AGAINST 4.A. IN-HOUSE REVENUE EXPENDITURE- STAFF COST, MATE RIAL OF RS. 5.30 CRORES INCURRED AS PART OF DEVELOPMENT PROJECT S FAVOUR 5. DEVELOPMENT EXPENSES EURO II PROJECT OF RS. 76. 55 LAKHS AGAINST 6. DEVELOPMENT EXPENSES EURO III PROJECT-RS. 5.14 LAKHS AGAINST 7. TECHNICAL SERVICES FEES OF RS. 53.49 LAKHS AGAIN ST 8. DISALLOWANCE U/S. 40A (9) RS. 7.37 LAKHS FAVOU R 9. PROVISION FOR WARRANTY COSTS OF RS. 23.48 CRORE SET ASIDE 10. INTEREST ON INCOME TAX REFUND RS. 1.26 CRORE AGAINST 8.1. RESPECTFULLY FOLLOWING THE ORDERS OF THE AY.S.2006- 0,1999-00,2000-01AND2001-02 (SUPRA),WE DECIDE GROUNDS NO. 3A.4,5, 6, 7 AND 10 AGAINST THE ASSESSEE,GROUND NO. 9 IS SET ASIDE AND REMAINING GROUNDS ARE DECIDED IN FAVOUR O F THE ASSESSEE. 9 .FIRST GROUND OF APPEAL IS ABOUT TP ADJUSTMENT OF R S.21.29 CRORE.FOLLOWING OUR ORDER FOR THE EARLIER AY.WE DIRECT THE TPO/AO TO FOLLOW THE DIREC TIONS OF THAT AY,WHILE DECIDE THE ISSUE AFRESH.THE ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY OF EFFECTIVE HEARING.GOA.1 IS PARTLY ALLOWED. 10. THIRD GROUND OF APPEAL,IS ABOUT WRITING OFF OF RS. 17.26 LAKHS. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD WRI TTEN OFF AND AMOUNT OF RS. 17, 26, 752/- UNDER THE HEAD OBSOLETE SYSTEM. WHILE DEALING WITH GROUND NUMBER TWO FOR THE EARLIER AY., WE HAVE DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE.FOLLOWING THE SAME,GOA 3 IS DECIDED IN FAVOUR OF THE ASSESSEE. 11. NEXT GROUND OF APPEAL IS ABOUT ADDITION MADE ON ACCOUNT OF PROVISION FOR DOUBTFUL DEBTS, U/S.115 JB OF THE ACT,OF RS.6.16 CRORE.WE HAVE DISM ISSED THE IDENTICAL GROUND FOR THE EARLIER AY. FOLLOWING THE SAME,GROUND NUMBER 11 IS DECIDED AGAINST THE ASSESSEE. ITA/7184/MUM/2012,AY. 2003-04: 6961/12;5533/12+2- MAHINDRA & MAHINDRA LTD. 17 12. REPRESENTATIVES OF BOTH THE SIDES AGREED THAT FIRST TWO GROUNDS OF APPEAL, RAISED BY THE AO (PROVISION FOR PENDING LABOUR DEMAND OF RS. 3.87 CR ORES AND DISALLOWANCE OF DEPRECIATION ON SALE OF UNDERTAKINGS)STAND DECIDED AGAINST THE AO A ND IN FAVOUR OF THE ASSESSEE BY THE ORDERS OF THE TRIBUNAL FOR THE AY.S.2000-01 AND 2001-02 (S UPRA).IT WAS FURTHER STATED GROUND NO.3 WAS CONSEQUENTIAL TO GROUND NUMBER ONE.ACCORDINGLY, WE DISMISS ALL THE GROUNDS, RAISED BY THE AO, FOR THE YEAR UNDER CONSIDERATION. AS A RESULT,APPEALS FILED BY THE ASSESSEE FOR THE B OTH THE AY.S.ARE PARTLY ALLOWED AND BOTH THE APPEALS OF THE AO STAND DISMISSED. . !'#$%' & '() !%' & '( . ORDER PRONOUNCE D IN THE OPEN COURT ON 21 ST MARCH,2018. * %! +' 21 %, ,2018 SD/- SD/- ( -.' / AMARJIT SINGH ) ( /*0 / RAJENDRA ) * . / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 21.03.2018. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.